Question

In the Job Market Signaling, suppose there are two types of workers where one type is more productive than the other. Assume the signal is education and that the intangible cost of the required signal amount of education is $1.75 for the less productive worker. Assume further that the more productive worker experiences a cost rate that is 60% lower than the less productive worker. If a firm offers a two-part wage scheme where workers with the signal amount of education receive a wage of $3.00 and those without it receive a wage of $2.00, calculate net wages in each case for each type of worker. Which type of worker, if either, will buy the signal? Draw a graph showing net wages in each case.

Answer 1

Cost of acquiring the education for:

1. Less Productive Worker = $ 1.75
2. More Productive Worker = $(1.75 * (40/100)) = $0.7

Wage offered are:

1. Worker with education = $3
2. Worker without education = $2

Now for the Less Productive Worker net wage :

	Less Productive Worker	More Productive Worker
Wage With Education	$ (3 - 1.75) = $ 1.25	$ (3 - 0.70) = $ 2.3
Wage Without Education	$ (2 - 0) = $ 2	$ (2 - 0) = $ 2

So, the worker with more productivity will buy the signal (education). And worker with less productivity will not buy the signal as it will give less wage than compared wage without education.